Aptevo Therapeutics is a nano-cap, cash-burning bio-tech spun from profitable billion dollar bio-defense
company Emergent Biosolutions (ticker EBS) on August 1st, 2016. Cash-burning bio-techs are perhaps
not for grandma’s account, but Aptevo is remarkably cheap for the more speculative investor. Trading
at $2.20, Aptevo was spun with $65 million ($3.25 a share) in cash and promised cash from the parent
net of debt that they have since taken on. Furthermore, three profitable drugs (Winrho, HepaGam B,
and Varizig) requiring little or no further investment were spun with Aptevo that the Aptevo CEO notes
are worth 2 times sales or about $3.50 a share. A fourth approved drug, Ixinity, began ramping sales in
2015 and has potential to grow to as much as $40 million in sales for a valuation at 2 times sales of $4 a
share if the company can work past current bulk production problems. Aptevo’s share price of $2.20
implies that the cash burning bi-specific drug candidate platform, Adaptir, has tremendous negative
value. Emergent Biosolutions acquired the Adaptir technology in 2010 for $78 million ($3.90 a share)
plus a contingent value right with a max value of $38.7 million. The pro-forma R&D spend since then
has been substantial. In 2014 & 2015, for example, the R&D spend on Adaptir and Adaptir drug
candidates totaled about $30 million and $20 million respectively for a total of $50 million ($2.50 a
share). The total investment in Adaptir and Adaptir drug candidates including the acquisition price and
R&D spend is perhaps in the $8 to $10 a share range.
It’s possible that Adaptir will just burn cash while producing little of value and Aptevo is definitely a
speculative investment. It doesn’t appear that Aptevo was spun exclusively to relieve the profitable
parent of the earnings drag, however. Significant assets including cash and profitable drugs were spun
with it and the Aptevo CEO sat on the Emergent Biosolutions board since 2010. He knew what he was
getting into. Further, the Chairman of the board owns 13.7% of the company and the officers and
directors are rather generously incentivized with options while drawing reasonable salaries. Also
encouraging is that a couple of successful investors have taken significant positions. John Petry, a
special situations investor formerly with Gotham Capital Management has taken an 8.4% position
through Sessa Capital Management. Perceptive Advisors, a very successful life sciences fund run by
biotech expert Joseph Edelman also bought nearly 5% of the company. Finally, the technicals have
turned positive recently after publication of phase 2 results showing effectiveness of their leukemia drug
drove a nearly 4 million share trading day. Perhaps Aptevo’s share price has already seen its bottom.
Emergent Biosolutions was a bio-defense company whose primary product was an anthrax vaccine. The
company diversified into bio-tech with a pair of acquistions. The Adaptir technology came with the $78
million (net of $19 million cash) plus CVR acquisition of Trubion in 2010. Aptevo’s four commercial
products came with the $222 million acquisitions of Cangene in February, 2014 although Cangene also
contributed bio-defense assets that stayed with the parent. The rationale for the spinoff is that both the
bio-defense and bio-tech businesses have opportunities that require capital. The shareholder base for a
profitable bio-defense and a cash-eating bio-tech are quite different. Separating them allows each to
raise capital from appropriate sources. Spinning rather than selling lets shareholders make up their own
mind whether they want to sell or hold the bio-tech assets. Most shareholders want to monetize but
the Aptevo COB perhaps wanted the option to continue to own. Aptevo intends to raise cash through
partnering individual drug candidates or perhaps the entire Adaptir platform with pharmaceutical
companies. The CEO also notes that they have worldwide rights to Ixinity and are open to partnering it
(perhaps by geography). The CEO expects partnering announcements and new drug candidates moving
into the clinic in the second half of 2017.He speculates in the Piper Jaffray Health Care Conference in
New York on November 30th that those announcements along with results from their two drugs
